"Let's Talk Markets" With Mike Krieger

I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.

- Thomas Jefferson

Anyone with eyes open knows that the gangsterism of Wall Street -- financial institutions generally -- has caused severe damage to the people of the United States (and the world). And should also know that it has been doing so increasingly for over 30 years, as their power in the economy has radically increased, and with it their political power. That has set in motion a vicious cycle that has concentrated immense wealth, and with it political power, in a tiny sector of the population, a fraction of 1%, while the rest increasingly become what is sometimes called "a precariat" -- seeking to survive in a precarious existence. They also carry out these ugly activities with almost complete impunity -- not only too big to fail, but also "too big to jail."

The courageous and honorable protests underway in Wall Street should serve to bring this calamity to public attention, and to lead to dedicated efforts to overcome it and set the society on a more healthy course.

- Noam Chomsky

The Worst Generation

Anyone that has been a long time reader of mine knows that in the past year or so I have transitioned much of my writing away from financial markets and toward social and political issues. There are several reasons for this but the primary driver is the fact that money in the bank doesn’t mean anything if we lose our freedom. The message I have been trying to get across to leaders of business in all industries is stop making these deals with the devil in order to take one more large bonus or beat EPS for another quarter. Your choices in pursuit of transitory wealth and status will be paid for by the loss of liberty and the tears of your children and grandchildren. Sadly, very few in positions of power in America seem to be listening and the lack of high profile/powerful people coming out and risking their own treasure for the long-term benefit of the Constitution and sacred values of this once great nation has been shockingly disappointing. To the so called “leaders” of America of today I send you a warning from the grave of the great Austrian economist and author of “The Road to Serfdom,” Friedrich Hayak. You will as a class be remembered as the worst generation in American history. A generation of leaders so filled with greed, hubris and selfishness that you sold out your nation without ever thinking twice about the tragedy that your silence would bring. A generation that never had the guts to risk any of their power or possessions for the good of their country. As Hayak so perfectly put it so many years ago about the rise of Nazi Germany…

The movement is, of course, deliberately planned mainly by the capitalist organizers of monopolies, and they are thus one of the main sources of this danger. Their responsibility is not altered by the fact that their aim is not a totalitarian system but rather a sort of corporative society in which the organized industries would appear as semi-independent and self-governing estates…But while the entrepreneurs may well see their expectations borne out during a transition stage, it will not be long before they will find, as their German colleagues did, that they are no longer masters but will in every respect have to be satisfied with whatever power and emoluments the government will concede them.

- Chapter Twelve “The Totalitarians in our Midst”

So in the end you will be also be made into a serf and for what? Was that last bonus really worth it?

Let’s Talk Markets

Ok, so as promised onto markets now. What is happening at the moment reminds me of 2008 in every way. We have seen tremendous inflationary pressures in the emerging world, which has now finally resulted in serious slowdowns in many nations. The China credit bubble, mal-investment house of cards that I first warned about in mid 2009 has started to unravel in earnest and this can be seen in industrial commodity prices such as copper. Europe is…well we all know about Europe. So in this type of environment the optimists will always invent a story that finds a silver lining. That’s fine, everyone is entitled to an opinion and clearly I have my own biases but I think the similarity to 2008 is what is important. Back then the spin was decoupling. Despite the blowup of the U.S. housing markets and it’s financial institutions, the spin back then was that the BRICs would keep growing and support the global economy. Of course, this is not the way it turned out and those economies plunged as well, just with a lag.

Well here in late 2011 we find ourselves in a similar situation; however, this time we are led to believe that the U.S. economy is the Atlas that will hold up the world with its strong corporate balance sheets and moderate growth. A bigger bunch of nonsense hasn’t been heard since 2008. That said, corporate earnings have held up in the U.S. better than in many other parts of the world and for the time being this makes it look better compared to the basket case situations happening in many emerging markets and in of course Europe. In a world where capital flies from one region or asset class to another in a split second we have seen U.S. equities vastly outperform most areas of the world this year. For example, the S&P 500 is down only 3% this year compared to -18% for Japan, -18% for Brazil, -17% for Germany and -22% for China. Let’s take a quick look at the Shanghai Composite.

Shanghai Composite One Year Chart

Not pretty, so now for the S&P 500…Looks ok doesn’t it!

There is a huge disconnect between these two charts and in fact most of the world’s markets look like China’s. So who’s right? I think it is pretty simple. Capital has been hiding in dollar denominated assets, equities included. In my opinion, this creates a huge opportunity. That said, I think the best way to play this is not to just straight up short U.S. stocks but to long gold against it.

The Dow/Gold Ratio

I have been writing about this ratio for years saying that it would hit 1:1 by the time this massive macro cycle has run its course. All that this ratio charts is the performance of equities in real terms (it is the Dow Industrials/Price of Gold) and it has been in a consistent downtrend since the stock market bubble popped in 2000 (it has dropped from 42 to 7.6 currently). Within any trend there will be counter rallies and these should be seen as a gift to take advantage of. Due to the fact that I believe markets are now consistently manipulated by the world’s central planners, it isn’t even worth the time or effort to make short term calls as it was hard enough when there was some semblance of a free market. Nevertheless, I am also of the belief that central planners can only make markets do their bidding in the short term and that in the end markets will win. This brings me to the current opportunity.

Dow/Gold One Year Chart

This counter trend rally has now hit 32% since the mid-August low when sentiment on stocks hit a low and that for gold hit a high. This is the biggest rally in the ratio in over two years. Look at the RSI and see how overbought it is. It is also testing the 200 day moving average as we speak, a level that stopped the last counter trend rally in early July. Even if you are bullish on stocks relative to gold, this rally is extraordinarily stretched and I think people and algos will pick up on this soon enough and we will have a vicious move in the other direction. Of course this can occur in many ways. Stocks can rally and gold can rally more but this is not what I think suspect will happen. I think U.S. equities will get a reality check and join in the weakness of the rest of the world’s markets. My sense is stocks will fall and gold will generally consolidate. I rarely see opportunities like this and that is why I decided to write about markets today. Let’s not forget that despite the recent plunge, gold has once again outperformed stocks by more than 13% this year. I suspect even great outperformance in 2012, when I think the Dow/Gold ratio will hit at least 5:1. On a side note, I purchased physical gold for the first time in over a year yesterday. I rarely do that anymore since I did most of my purchasing in 2008/2009 and I only do so when I have very high conviction that the worst is over.

TF Metals Podcast

To conclude, I had the distinct pleasure of doing a podcast with “Turd Ferguson” of TF Metals. Since doing this interview I have spent quite a bit of time on his site and I have to say it is a must read for anyone in the precious metals sector. I am really pleased with how it turned out and I was able to cover some very important topics that I haven’t had a chance to in these pieces. You can listen to it here http://www.tfmetalsreport.com/podcast/3113/tfmr-podcast-8-mike-krieger . I hope you enjoy!

Actually, the read I take on this is that gold will stay while the markets go down. I do think silver will be dragged up to gold and eventually settle @ its historic 16:1 ratio (maybe better if this whole silver shortage turns into reality). But the question is...will gold go higher, or everything else just tank?

I think we're about to see a new depression and gold may dip back to $900s or lower before it rockets up thanks to inflation catching up with us. I've been waiting for the sustained dip into the $1500s to increase my gold exposure (physical) but the physical market is still mid 1600s.

We'll see...seems like lots of inflationary deflationary death spiral price action lately in real asset prices (ie food, not paper trade bs). And that 4 Quadrillion derivative exposure is still out there in the shadows.

Historically, these type of death spirals can last up to 20 years if "policy makers" don't change their ways. So it could be a long slow slog.

When Chomsky's ACTIVE and CURRENT IRA's in blue chips and other hegemonious financial positions are closed out and he quits his capitalistic funded university gig and stops getting paid by GE owned publishers for his books, then maybe, just maybe-- fuck it-- he is what he is-- and I prefer the Jefferson quote anyhow in all it's glorious simplicity.

So many great posts, charts, opinions, etc. on the coming Great Purge and yet here we still are levitating on hopium shit fumes.

I too have no issue with Chomsky in terms of his writings, for the most part. It's just that he's as full of shit as the next banker, in deed, though clearly not in terms of destructive potential. Too bad he doesn't conform to what he preaches and espouses. Progress, not perfection. And his self-hatred is at times painful to witness.

"It is to be regretted that the rich and powerful too often bend the acts of government to their own selfish purposes." - Andrew Jackson

"You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold." - George Bernard Shaw

“You can ignore reality, but you can’t ignore the consequences of ignoring reality.” – Ayn Rand

What are your toughts about Hungary and the Hungarian forint and markets regarding that Hungarian goverment nationalizes copmanies, attacked the pension system and now that they want to rule the Hungarian Central bank?

"On a side note, I purchased physical gold for the first time in over a year yesterday. I rarely do that anymore since I did most of my purchasing in 2008/2009 and I only do so when I have very high conviction that the worst is over."

so. the worst is over for gold, or for the markets? does not compute (in computer voice) analyzing! analyzing!

Quite a bit of discussion this week about the speeding up of the problems. I wonder if the Bernanke can hold things off until 2012. I have a bonus I need to convert to real assets while the fiat I am paid in becomes wallpaper. Any predictions?

Pfft, another paper trader, ignorez. You should buy gold at any price, it doesn't matter. Gold prices can only go up. This guy should read more of the other articles on here, he'd learn a thing or two about investing in gold.

…money in the bank doesn’t mean anything if we lose our freedom.The message I have been trying to get across to leaders of business in all industries is stop making these deals with the devil in order to take one more large bonus or beat EPS for another quarter.Your choices in pursuit of transitory wealth and status will be paid for by the loss of liberty and the tears of your children and grandchildren. --Mike Krieger

The early patriots and signers of the Declaration of Independence wanted the opportunities they had found in a new land permanently guaranteed to themselves and their descendants. The Declaration of Independence was a declaration of war…they pledged their lives to sign it and knew their plight if they failed.

We need men who will stand. The men who will stand and stand for justice will turn the tide. In his “Uncle Abner” series, Melville Davisson Post made it clear: “I saw that law and order and all the structure that civilization had builded up, rested on the sense of justice that certain men carried in their breasts, and those who possessed it not in the crisis of necessity, did not count.”

That’s what Krieger is calling out, if you have a sense of justice, that bonus is nothing compared with what you will lose.

Here is the biography of Thomas Nelson, Jr., (1838-1789), Virginia, one of the Signers of the Declaration of Independence:

“Another of the Southerners possessing great wealth was Thomas Nelson, Jr. To his honor let it be noticed that he gave his entire fortune to his country when its need became urgent, and died penniless. At one time the issuance of a two-million-dollar loan was necessary to repel the enemy from Virginia soil. This full amount Nelson raised over night by mortgaging his estates. The next day his own home was occupied by the personal staff of Cornwallis. It was at Yorktown and the Revolutionary forces were on the offensive. Nelson, who was Governor at the time, visited the firing line. Noticing that the entire neighborhood was being razed by the artillery, he inquired why it was that the fire was not directed at his own dwelling. ‘We are sparing it out of respect to you, Governor,’ replied one of the young Lees. ‘Give me the cannon,’ retorted Nelson. ‘Do this,’ he added, and he fired a ball through the house. Subsequent shots destroyed the place and forced the enemy to flee. And so it was always with Nelson—America first.”

The message I have been trying to get across to leaders of business in all industries is stop making these deals with the devil in order to take one more large bonus or beat EPS for another quarter. Your choices in pursuit of transitory wealth and status will be paid for by the loss of liberty and the tears of your children and grandchildren.